Agilent Technologies‘ (A) fiscal first quarter earnings were in line with the Zacks Consensus estimate, led by weakness in the core semiconductor testing business.
Revenue
Agilent’s revenue was down 5.4% sequentially and up 7.3% year over year, not reaching management’s expectations of a 3-5% sequential decline($1.65 billion to $1.67 billion). Currency did not have a significant impact on total revenue.
Agilent saw year-over-year revenue growth across all geographies, although Asia was strongest, with Japan growing 10% and other Asia growing 12%. Europe grew 4% and the Americas 3%. However, Europe was the only region to grow on a sequential basis (up 2.5%). The Americas and Asia/Pacific were down 11.0% and 4.9%, respectively. The Americas, Asia and Europe generated 35%, 39% and 26%, of quarterly revenue, respectively. Agilent’s consistent performance in Asia is on account of regulatory moves to improve safety standards in the region.
The strongest year-over-year growth came from the Forensics/environmental market (up 19.2%) and pharma/biotech (up 14.4%). All other end markets grew a little over 7%, with the exception of communications, which declined 9.7%.
Pharma/biotech was also the strongest market in the sequential comparison, having grown 8.1%. The aerospace/defense market grew 4.1%, while all other end markets declined.
Revenue by Segment
Agilent reports results in three segments–Chemical Analysis, Life Sciences and Electronic Measurement. Management stated that both Chemical Analysis and Life Sciences benefited from easier comps with the year-ago quarter, due to revenue delays related to the Varian acquisition in the year-ago quarter.
The Chemical Analysis segment generated 24% of first quarter revenue. The 2.2% sequential decline was because of weakness across the petrochemical, environmental and food markets, while the 13.5% year-over-year growth was driven by relative strength in all markets.
The Life Sciences segment generated 28% of revenue, down 2.1% sequentially and up 14.1% from last year. The strength in pharma/biotech was not enough to offset the very significant decline in academic/government. Agilent remains well positioned to take advantage of the replacement cycle for lab instrumentation. The increase from the year-ago quarter was driven by both end markets, although pharma/biotech grew more significantly.
Agilent’s Electronic Measurement remains Agilent’s largest segment, with a revenue contribution of 48% in the last quarter. Although down 9.0% on a sequential basis, the segment was flat with last year. Segment revenue is very well diversified across geographies, with the Asia/Pacific contributing 45%, the Americas 36% and Europe the remaining 19%.
Agilent’s commentary indicated that the weakness was on the infrastructure side, where there was an unexpected softness in wireless infrastructure spending across the world and particularly in China. Additionally, the RF component supply chain also cut back spending. Therefore, revenue declined despite the double-digit growth in handset test. The general purpose test business also shrunk, as the weakness in industrial more than offset the increase in aerospace/defense revenue.
Agilent remains one of the largest providers of spectrum analyzers, network analyzers, signal sources and oscilloscopes, revenues from all of which grew in the last quarter.
Orders
Agilent saw orders declining 7.4% sequentially and 0.2% year over year. Electronic Measurement, being the largest segment by far had the most significant impact (down 7.9% sequentially, 5.0% year over year). Life Sciences orders declined 9.0% sequentially and increased 4.8% from last year. The Chemical Analysis segment saw orders declining 4.3% sequentially and growing 3.9% from a year ago.
Agilent’s book-to-bill ratio was just below unity, as positive BTB in both the Chemical Analysis and Life Sciences segments was offset by negative BTB in Electronic Measurement.
The proforma gross margin for the quarter was 54.9%, down 11 basis points (bps) sequentially and 32 bps from the year-ago quarter. While Agilent remained optimistic about additional synergies related to Varian, it is obvious that the relatively slow growth in industrial and semiconductor markets was a pressure on testing revenue, which impacted the gross margin. However, cost controls remain of paramount importance.
Operating expenses grew very slightly on both sequential and year-over-year bases, as Agilent continued to contain costs. However, despite these efforts, the operating margin, at 19.2% dropped 238 bps sequentially and 149 bps from last year due to lower revenues. Both R&D and SG&A increased as a percentage of sales from the previous quarter and declined from the year-ago quarter.
Opex control was very good across all segments. Operating margins on a GAAP basis were up 360 bps, 244 bps and 33 bps, respectively on a year-over-year basis in the Chemical Analysis, Life Sciences and Electronic Measurement segments. However, they were down 173 bps, 12 bps and 388 bps from the September quarter.
Net Income
Agilent generated a pro forma net income of $244 million, or a 14.9% net income margin compared to $292 million or 16.9% in the previous quarter and $212 million, or 13.9% in the first quarter of last year. Our pro forma estimate excludes restructuring charges, acquisition-related costs, amortization of intangibles and other one-time items, as well as tax adjustments.
On a fully diluted GAAP basis, the company recorded a net income of $225 million ($0.64 per share) compared to income of $289 million ($0.82 per share) in the previous quarter and $204 million ($0.57 per share) in the year-ago quarter.
Balance Sheet
The balance sheet shows a net cash position of $1.48 billion, an improvement over the net cash position of $1.34 billion at the beginning of the quarter. Agilent generated $150 million from operations in the last quarter, spending $46 million on capex, $55 million on acquisitions and $34 million on share repurchases. The debt to total capitalization ratio also dropped to 32.6% from 33.6% at the beginning of the quarter.
Inventories at quarter-end were flat with the previous quarter, with annualized inventory turns flat at 3.2X. Days sales outstanding (DSOs) were flat at around 45.
Guidance
Agilent expects fiscal second quarter revenue of $1.70 billion to $1.72 billion (a 4-5% sequential increase). Consensus expectations were at $1.71 billion when the company announced guidance, within the guided range. Non GAAP earnings are expected to be 71 to 73 cents a share, lower than the Zacks Consensus Estimate of 73 cents.
Agilent expects 2012 revenue of $6.92-7.02 billion at current exchange rates, with the non GAAP earnings coming in the range of $3.13 to $3.23 a share.
Recommendation
The modest results and guidance seem to indicate temporary sluggishness in results. However, revenues are significantly diversified across end markets, so we do not expect any major weakness. Agilent’s performance appears similar to other testing companies, such as Teradyne (TER).
The Varian acquisition is an added positive that is expected to generate significant cost synergies, thus driving further earnings growth. Agilent also continues to introduce new products (with higher margins), which along with those acquired from Varian should generate continued growth.
Additionally, the balance sheet is in much better shape right now, which makes the shares more attractive.
We have a short-term Hold rating on Agilent shares, as indicated by the Zacks #3 Rank
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